The Non-Revolving Door Between the SEC and the Plaintiffs’ Bar

Nowhere does the “revolving door” spin more quickly than at the Securities and Exchange Commission. But, even at the SEC, not all doors spin so fast — or at all, like the door between the SEC and the plaintiffs’ bar.

It’s that time again: presidential transition. Across Washington, officials looking to “cash in” on their government experience are leaving agencies for law firms, lobbying shops, and other lucrative positions where they will help private companies navigate the very same regulatory systems they’ve just been helping to shape and enforce. This goes both ways, of course, with positions in the incoming Biden administration already quickly filling up with individuals drawn from the same industries they will soon be charged with overseeing.

Nowhere does the “revolving door” spin more quickly than at the Securities and Exchange Commission. One recent study found that a majority of the agency’s enforcement attorneys ultimately leave to join the private sector. Another showed how the agency has abandoned a longstanding practice of promoting career government officials to senior management roles and is instead increasingly filling these positions with individuals drawn from the regulated industry.

But, even at the SEC, not all doors spin so fast — or at all.

In a new paper, I examine the movement of personnel between the SEC and plaintiffs’ side law firms that represent injured shareholders in class action litigation. There are good reasons to expect that SEC attorneys would be attracted to this work. Joining a plaintiffs’ firm might allow an SEC attorney to feel they were pursuing the same mission of holding companies accountable for fraud and protecting investors. There is also a significant overlap between the legal regimes and skills relevant to both types of practice.

Moreover, class actions can be extremely lucrative; I estimate the annual revenues per lawyer of one leading plaintiffs’ side firm and find that it compares favorably with that of the leading defense-side firms. Finally, attorneys do seem to move between governmental and private enforcement positions in other areas where there is a similar dual-track enforcement regime, such as false claims act, environmental law, civil rights, and (to a lesser extent) antitrust.

Given all this, you might be surprised to learn that the door between the SEC and the plaintiffs’ bar does not revolve. Specifically, my paper shows that:

• None of the ten leading plaintiffs’ side securities litigation firms employ any attorneys with recent SEC experience doing traditional plaintiffs’ side work;
• None of the attorneys that I identified as working for the SEC’s Enforcement Division in 2015 left to pursue traditional plaintiffs’ side litigation;
• None of the upper or middle-managers in the SEC’s Enforcement Division as of January 2020 had worked for the plaintiffs’ bar; and
• Only five of the attorneys that I identified as working for the Enforcement Division in 2019 had prior experience in plaintiffs’ side shareholder litigation.

For decades, SEC leaders, Congress, and the courts have repeated the mantra that private securities litigation is an “essential supplement” to SEC enforcement. The real people doing this work may beg to differ.

The non-revolving door between the SEC and the plaintiffs’ bar may be an example of “cultural capture” at work. While traditional academic analysis of the “revolving door” focuses on evidence of a material quid pro quo — for instance, an enforcement attorney who receives an offer of lucrative private sector employment in exchange for going “easy” on that target while she’s in government — more recent work has acknowledged that government officials may come to internalize industry preferences as a result of softer mechanisms and influences. The rapidly revolving door between the SEC and the defense bar, and the close contact SEC attorneys have with defense-side attorneys throughout investigations and enforcement actions, give SEC attorneys ample exposure to the defense bar’s characteristic skepticism and hostility towards securities class actions and the lawyers who pursue those cases. By contrast, SEC attorneys are unlikely to have any direct contact with plaintiffs’ attorneys, even when there is a parallel private lawsuit against a company they are pursuing.

A possible cultural bias against private enforcement among SEC attorneys would have significant consequences for SEC enforcement. As I have argued elsewhere, the SEC’s enforcement activities can have substantial downstream effects on the flow of private securities litigation, and the agency’s line attorneys often wield broad discretion to shape those effects. If SEC enforcement attorneys harbor a bias against private litigation, they might systematically exercise their discretion to undercut rather than catalyze private litigation. Some longstanding trends in SEC enforcement — including the agency’s persistent failure to require corporate defendants to admit wrongdoing when settling charges — seem to point in this direction. Mistrust or animus between public and private enforcers might also increase the “coordination costs” in our decentralized multi-enforcer regime for policing corporate misconduct. While the SEC often works closely with other governmental actors, such coordination is strikingly absent when it comes to private enforcers. 

There is one area where SEC attorneys do move into private enforcement. Created by Dodd-Frank, the SEC’s whistleblower program provides monetary incentives for individuals to come forward and report possible violations of the federal securities laws to the SEC. Although SEC attorneys have almost completely avoided traditional plaintiffs’ side lawyering, they have been jumping through the revolving door to represent whistleblowers.

From the perspective of the attorneys involved, this new revolving door is eminently reasonable. Unlike traditional plaintiffs’ side work, whistleblower representation is oriented around the agency itself, and therefore allows these attorneys to leverage their unique government expertise and connections for a competitive advantage.

But the rise of the whistleblower industrial complex is also troubling. A whistleblower firm led by five former SEC officials has been disproportionately successful in obtaining awards from the agency. I found that, as of September 2020, clients represented by that firm had obtained about one quarter of all dollars paid out by the agency to date. This figure may actually understate the firm’s dominance: the SEC does not disclose the names of the law firms or attorneys representing successful whistleblowers, and so this calculation includes only the successes that have been voluntarily publicized. (I have several FOIA requests pending with the agency on the subject.)

Concerns about the rapidly revolving door between regulators and industry (at the SEC and beyond) are not going away. As this important debate continues, we should broaden our focus, watching not only the doors government officials walk through, but also the ones they don’t.